• Camel Group Co., Ltd. (“Camel Group”), and
• Chenguang Biotech Group Co., Ltd. (“Chenguang Biotech”) and its subsidiary Chenguang Biotechnology Group Yanqi Co. Ltd. (“Chenguang Biotech Yanqi”).

Goods produced by these companies, wholly or in part, will be restricted from entering the United States. The addition of these companies brings the total number of entries on the UFLPA Entity List to 24.

Camel Group, headquartered in Xiangyang City, Hubei Province, China, is one of the world’s leading manufacturers of car batteries, particularly lead-acid batteries. Camel Group was ostensibly added to the Entity List on the grounds that it is allegedly “working with the government of Xinjiang to recruit, transport, transfer, harbor or receive forced labor or Uyghurs, Kazakhs, Kyrgyz, or members of other persecuted groups out of Xinjiang.” (Sec. 2(d)(2)(B)(ii), Pub. L. 117-78).

Chenguang Biotech is headquartered in Handan, Hebei Province, China, and produces plant-based extracts, food additives, natural dyes, pigments, and supplements from agricultural products. Chenguang Biotech Yanqi is based in the Xinjiang Uyghur Autonomous Region and is engaged in the production of food additives and nutritional supplements. These companies were ostensibly added to the UFLPA Entity List on the grounds that they allegedly “source material from Xinjiang or from persons working with the government of Xinjiang or the Xinjiang Production and Construction Corps for purposes of the ‘‘poverty alleviation’’ program or the ‘‘pairing-assistance’’ program or any other government-labor scheme that uses forced labor.” (Sec. 2(d)(2)(B)(v), Pub. L. 117-78).

The 2023 UFLPA Strategy Updates are relatively limited. There have been no official changes to the list of high priority sectors, although the report notes that “CBP continues to enforce the UFLPA against all sectors, prioritizing across all tariff codes in the Harmonized Tariff Schedule that could be at risk of having a supply chain that touches Xinjiang.” These prioritized “tariff codes” are not disclosed, and their relationship to the so-called “high-priority sectors” is not discussed.

While not officially updating the list of high priority sectors, the 2023 UFLPA Strategy Update does call out several additional categories of products as “potential risk areas” including “red dates and other agricultural products, vinyl products and downstream products, aluminum and downstream products, steel and downstream products, lead-acid and lithium-ion batteries, copper and downstream products, electronics, and tires and other automobile components.”

The 2023 UFLPA Strategy Updates also discuss the FLETF’s ongoing engagement with nongovernmental organizations (NGOs). NGOs are given a direct line of access to FLETF, which means that NGO allegations of forced labor in global supply chains must be treated with extremely careful consideration.

[1] The 2023 UFLPA Strategy Updates was published on July 26, 2023, but shared publicly on August 1, 2023.

The key findings of the report are as follows: (1) notwithstanding some noticeable impact of the USMCA on the U.S. economy and U.S. competitiveness, it is too early to understand the full extent of the effect of the agreement; (2) the automotive ROOs appear to have increased costs as well as the U.S. share of USMCA production; (3) there is a sharp increase in investment in electric vehicles (EVs) and the industry shift to EV production will likely require changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure they remain relevant; and (4) additional technological changes may also impact the relevancy of the USMCA automotive ROOs.

Background

The USMCA entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). Over the past three years, the agreement has presented some opportunities and challenges for the United States and its main trading partners. Some of the biggest challenges pertain to the treatment of automotive goods under the agreement.

Under the USMCA, an originating good is one that meets the rules of origin set forth in General Note 11 of the Harmonized Tariff Schedule of the United States (HTSUS) and all other requirements of the agreement. An additional set of rules applies to automotive goods (specifically, passenger motor vehicles, light and heavy trucks, and certain automotive parts). Specifically, automotive goods must meet four additional ROOs: (1) regional value content (RVC) requirements; (2) North American steel and aluminum procurement requirements; (3) labor value content requirements; and (4) core parts requirements.

Pursuant to section 202A(g)(2) of the USMCA Implementation Act, the ITC is required to provide five biennial reports to the President, the House Committee on Ways and Means, and the Senate Committee on Finance, regarding (1) the economic impact of the automotive ROOs; (2) the operation of the automotive ROOs and their effects on the competitiveness of the United States; (3) whether the automotive ROOs are relevant in light of technological changes in the United States; and (4) any other matters the ITC considers relevant to the economic impact of the rules.

This is the first of five biennial reports on the economic impact of the USMCA automotive ROOs. The next report, due in 2025, has the same reporting requirements but will present updated data and information about the industries through December 31, 2024. Each subsequent report will report on the same topics and two new years of data and information.

ITC Findings

Economic Impact of the USMCA Automotive ROOs and Their Effects on U.S. Competitiveness

While the full impact of the USMCA will not be apparent until the agreement is fully implemented, in 2027 or later, the ITC has found that the economy-wide effects of the ROOs were marginal in the first two and a half years after the USMCA entered into force. According to the report, vehicle manufacturers and suppliers explain that the ROOs have increased costs at multiple stages of the supply chain, but that they have also increased the U.S. share of USMCA vehicle and parts production. The COVID-19 pandemic and global supply chain disruptions had a major impact on U.S. automotive production and trade. Consequently, there is no clear picture of the effect of the USMCA’s entry into force on U.S. competitiveness.

One potential indication of increased U.S. competitiveness is that the United States’ share of USMCA light vehicle production, as well as light vehicle and parts exports as a share of global exports, increased slightly after the agreement’s entry into force. U.S. light vehicle production as a share of USMCA production increased from 64.8 percent in 2018 to 68.1 percent in 2022. U.S. light vehicle exports as a share of global light vehicle exports increased from 6.6 percent in 2018 to 7.7 percent in 2022. U.S. automotive parts exports as a share of global parts exports also increased from 8.1 percent of global exports in 2018 to 8.4 percent in 2022.

Employment and investment data also indicate some changes in competitiveness. Investments in Canada and the United States have reportedly increased sharply, with most of the new investments going into EVs and EV batteries. The surge in investment in EVs is thought be in response to an increase in consumer demand, therefore, the extent to which these changes can be attributed to the ROOs remains unclear.

Technological Changes Impacting the Relevance of the USMCA Automotive ROOs

Because the agreement is in its early years of implementation, the overall impact of any technological changes is limited. According to the report, two recent technological changes in the U.S. automotive industry have created divergences in the tariff treatment of similar goods in the USMCA automotive ROOs. The first change pertains to the growth in production of electric and hybrid pickup trucks. Currently, the USMCA automotive ROOs do not categorize EV and hybrid pickup trucks as light trucks. Unlike other trucks, EV and hybrid pickup trucks are classified under HTSUS subheading 8704.90, which covers all trucks not classified elsewhere in heading 8704. Vehicles under 8704.90 are categorized as “heavy trucks” under the USMCA automotive ROOs. This difference in classification means that a different set of product-specific ROOs applies to EV and hybrid trucks. Until recently, sales of EV and hybrid trucks were really low or nonexistent. However, the increasing demand for EV and hybrid trucks means that the disparate treatment of these vehicles will have important practical implications. The report addresses several other instances of classification divergence that do not result in different tariff treatment for similar goods to demonstrate where Harmonized System (HS) classifications have changed since the USMCA entered into force.

The second technological change involves a new production process for aluminum vehicle bodies. Currently, the USMCA automotive ROOs do not allow for cast aluminum bodies to qualify as originating via the same product-specific ROOs as stamped aluminum bodies. The difference in treatment between stamped and cast aluminum body parts is due to the tariff shift rules for aluminum components. Under the USMCA, non-originating aluminum may be considered originating if the aluminum is subjected to a manufacturing process in a USMCA country that results in certain tariff shifts. For example, an aluminum product, such as an ingot, may be deemed originating if it is subjected to a manufacturing process such that it transforms into another intermediary aluminum product (classified under a different HS heading from the original product). However, the process of casting aluminum products, unlike the stamping process, does not produce an intermediary aluminum product. This allows for stamped body parts to qualify as originating more easily than cast body parts.

In addition to tariff classifications, the report addresses input from various stakeholders on proposed changes to the automotive ROOs. According to the report, some stakeholders believe that the industry-wide shift to EVs and hybrid vehicles merits changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure that they remain relevant. Some stakeholders have proposed additions to the ROOs parts lists that they believe would better account for the increasing share of EVs in the U.S. market. The International Union, United Automobile, and Aerospace and Agricultural Implement Workers of America (UAW) have proposed adding EV components and EV battery components to the core parts list of the USMCA automotive ROOs. The list proposed by the UAW includes automotive-grade semiconductors, electric motors and electric drivetrains, non-lithium-ion batteries, charge ports and charging stations, various battery components (cathodes, anodes, separators, casings), and various critical minerals (cobalt, nickel, manganese, graphite, silicone). Other stakeholders stated that EV technologies are already addressed by the ROOs and that because the technology is still evolving and industry investments and changes are ongoing, any proposed changes are premature.

Finally, the report addresses additional ongoing technological changes in the U.S. automotive industry that may impact the relevancy of the USMCA automotive ROOs. One such change is with respect to the increasing value of nontraditional automotive inputs relative to the value of the final vehicle and how this might impact the RVC calculations for the larger vehicle components being produced with a growing share of nontraditional parts. The value of nontraditional automotive inputs (i.e., semiconductors and sensors) is rising both in an absolute sense as well as relative to traditional automotive inputs. Some in the automotive industry believe the rising value of nontraditional automotive inputs merits changes to the ROOs because electronic components typically originate from Asia. One industry proposal addressing this issue involves adding certain electronic components, such as automotive-grade semiconductors and sensors, to the USMCA automotive core parts list to incentivize USMCA-originating electronic supply chains. Core parts must satisfy the higher 75 percent originating content requirement to qualify for preferential treatment.

Another technological change relates to the lack of recycling-specific automotive ROOs. According to the report, the “current treatment of recycled battery materials under the USMCA automotive ROOs may pose challenges to emerging supply chains because of a lack of recycling-specific provisions in the ROOs.” Currently, for example, the determination of whether a battery made using recycled materials qualifies as originating under the USMCA relies on the same ROOs applied to the original battery, i.e., whether the recycled cells were created within the USMCA region.

Tags: ITC, Rules of Origin, USMCA

U.S. parties with business in Africa’s gold industry face heightened risk of a counterparty being designated as an SDN, particularly given the Advisory and recent SDN designations. As a reminder, SDNs are subject to “blocking sanctions,” meaning that U.S. persons are broadly prohibited from conducting business with the SDN or any entity owned 50 percent or more by SDN, and U.S. persons must formally “block” (freeze and report) any property or interests in property that are in an SDN’s possession or control. The Advisory notes several possible reasons for designation, including human rights violations, support for terrorist or armed forces organizations, or support for Russia’s war efforts. Even if OFAC does not designate a contractual counterparty, U.S. persons could face liability or reputational damage if the African entities are supporting SDNs or other sanctioned actors, or engaging in other malign activity such as corruption, money laundering, or smuggling.

It is critical to conduct fulsome, risk-based due diligence prior to engaging with the gold industry. Due diligence should not end at onboarding, and companies should develop procedures for ongoing auditing to quickly detect and deter any compliance concerns. Rights to exit the contractual relationship are also essential to avoid breach of contract concerns when terminating dealings with a newly designated SDN. As with other industries flagged by OFAC as high-risk (e.g., shipping, aviation), the gold industry presents unique challenges that require close attention and a robust compliance program to avoid potentially costly mistakes.

The Inflation Reduction Act of 2022 (“IRA”) overhauled a tax credit for purchasing EVs and introduced certain sourcing requirements for EV components. The goal of the IRA is to encourage companies to develop new supply chains for critical minerals such as lithium, graphite, cobalt, and nickel outside of China. Currently, the majority of lithium is produced in China, Australia, and Chile. China is also the world’s largest producer of graphite.

Under the IRA, consumers can get a tax credit of up to $7,500 for qualifying vehicles. In order to qualify, a certain percentage of the EV battery needs to be built in North America, and much of the critical minerals in a vehicle’s battery must be sourced from the United States or a country that has a “free trade agreement” with the United States.

Because the United States does not have traditional free trade agreements with many of its allies, including Japan, the European Union, and the United Kingdom, the Biden Administration is pursuing limited trade deals such as the one signed with Japan. Among other things, the United States and Japan have agreed not to levy export duties on critical minerals and to coordinate labor standards in producing minerals. The United States is currently negotiating similar agreements with the European Union and the United Kingdom.

Efforts to reach these deals with U.S. allies has raised the question of whether such narrow agreements will meet the definition of “free trade agreement” under the IRA. While the provision of the IRA that requires vehicles to be assembled in North America went into effect immediately when the IRA was signed in August 2022, the battery sourcing provisions were left to be decided by the Treasury Department. On March 31, 2023,Treasury issued long-awaited proposed guidance on the critical mineral sourcing requirements for the EV tax credit under the IRA. According to the guidance, to meet the critical mineral requirement, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or with a country with which the United States has a “free trade agreement,” or be recycled in North America. The qualifying critical minerals sourcing requirement will increase from 40 percent in 2023 to 80 percent by 2027.

Importantly, the guidance includes a set of principles to identify countries with which the United States has a free trade agreement in place, since the term is not defined in statute. According to the Treasury Department’s proposed definition, “free trade agreement” as used in the IRA could include newly negotiated limited agreements, such as the deal reached with Japan, to ensure that minerals from these trading partners will meet the sourcing requirement for the tax credit. Treasury’s guidance also specifically lists the following countries as already having a free trade agreement with the United States: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

The guidance also sets forth applicable percentages for the value of the battery components that must be manufactured or assembled in North America for the vehicle to qualify for tax credits under the IRA, ranging from 50 percent in 2023 to 100 percent by 2029. The four-step process for determining the value of the battery components includes: (1) identifying the batter components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component, including North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Further, beginning in 2024, an eligible vehicle may not contain battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. Treasury intends toprovide further guidance on this particular provision.

The guidance will be published in the Federal Register on April 17, 2023, and vehicles placed in service on or after April 18, 2023, will be subject to the critical mineral and battery component requirements in the rule. The Treasury Department and the Internal Revenue Service (“IRS”) will consider public comments, due by June 16, 2023, before issuing a final rule.

The CHIPS Act can be thought of as the “carrot” – designed to bolster American semiconductor manufacturing – to the “stick” of recent export controls that the United States (and the Netherlands and Japan) have implemented targeting China’s ability to both purchase and manufacture certain high-end chips used in military and AI applications. In particular, the strategic objectives of the CHIPS Act are to “(1) make the U.S. home to at least two, new large-scale clusters of leading-edge chip fabs, (2) make the U.S. home to multiple, high-volume advanced packaging facilities, (3) produce high-volume leading-edge memory chips, and (4) increase production capacity for current-generation and mature-node chips, especially for critical domestic industries” by the end of the decade.

The CHIPS Act provides “$50 billion to revitalize the U.S. semiconductor industry, including $39 billion in semiconductor incentives.” The funding provided will be distributed across several programs, each targeting a specific area of need. Eligible applicants for the first round of funding are those seeking funds to “construct, expand, or modernize commercial facilities for the production of leading-edge, current-generation, and mature-note semiconductors. This includes both front-end wafer fabrication and back-end packaging.”

The first round of funding will focus on how projects will advance U.S. economic and national security. Candidates will also “be evaluated for commercial viability, financial strength, technical feasibility and readiness, workforce development, and efforts to spur inclusive economic growth.”

Parties interested in applying must first submit a statement of interest to Commerce. Afterwards, applicants may submit a pre-application (recommended) before submitting a full application. Commerce began accepting pre-applications for leading-edge facilities on March 31, 2023, and will be accepting full applications for those facilities on a rolling basis. On May 1, 2023, Commerce will begin accepting pre-applications for current-generation, mature-node, and back-end production facilities on a rolling basis and full applications for these categories will be accepted on a rolling basis beginning June 26, 2023.

Recipients will receive funds in the form of direct funding, federal loans, and/or federal guarantees of third-party loans. For additional information on the application process, visit: CHIPS Act Fact Sheet.

The next round of funding will be announced in late spring for semiconductor materials and equipment facilities and Commerce will release one more round in the fall for research and development facilities.

Invoking the DPA, President Biden authorized the Department of Energy (“DOE”) to take action to accelerate domestic production of clean energy technologies. President Biden’s exercise of DPA authority includes five presidential determinations targeted toward key areas in the renewable energy industry:

• Solar panel inputs, including photovoltaic modules and components thereof;
• Building insulation, especially for older, less efficiently retrofitted buildings;
• Heat pumps used to efficiently heat and cool buildings;
• Equipment used to make and use clean electricity-generated fuels, such as electrolyzers, fuel cells, and related platinum group metals; and
• Transformers and other critical power grid infrastructure.

In five memoranda addressed to the Secretary of Energy issued on June 6, 2022, and published in the Federal Register on June 9, 2022, President Biden invoked Title III of the DPA, which authorizes the President to direct certain activities in order to “create, maintain, protect, expand, or restore” domestic industry capabilities essential to national defense. 50 U.S.C. § 4533(a)(1) (2022). To achieve this, Title III authorizes the President to order government purchases of or commitments to purchase critical resources or technology, subsidize domestically-produced materials to ensure its availability, or order installation and purchasing of supplies for government and privately owned industrial facilities to expand their production capacity in order to aid the national defense.^[2] In issuing each memorandum, President Biden waived certain DPA statutory requirements after determining that action is necessary to avoid a shortage in the subject critical resource or technology that would severely impair national defense capability. See 50 U.S.C. § 4533(7)(B) (2022). Nonetheless, each memorandum addresses the three-pronged determination required by section 303(a)(5) of the DPA and discussed further below.

The stated purpose in each memorandum is to ensure a “robust, resilient, and sustainable domestic industrial base” necessary for a clean energy economy, which President Biden determined is essential to “national security, a resilient energy sector, and the preservation of domestic critical infrastructure.”^[3] According to the DOE, this DPA action will advance the Administration’s goals to reduce U.S. reliance on foreign energy supply—specifically, imports from Russia and China—and promote energy independence, reduce energy use, lessen reliance on fossil fuels and address climate change, create jobs, and decrease energy costs for American families. The DOE also notes high levels of U.S. and global demand for renewable energy technology and the expectation that this demand will continue to increase. Without this DPA action, the DOE predicts domestic supply capabilities would be insufficient, vulnerable to supply chain disruptions, and overly reliant on imports. Consequently, per section 303(a)(5) of the DPA, each memorandum asserts President Biden’s determination with regard to each of the five targeted areas:

• (1) the stated sector of the domestic energy industry is essential to national defense;
• (2) President Biden’s exercise of section 303 authority is necessary to ensure that the domestic industry can timely supply and satisfy the domestic need for the stated technology; and
• (3) purchases, purchase commitments, or other action under section 303 of the DPA are the most cost effective, expedient, and practical means of achieving the stated purpose for each measure.

[1] In a separate section of the statute, the DPA notably excludes from the President’s scope of authority the ability to control employment contracts. See 50 U.S.C. § 4511(c)(1) (2022).

[2] For additional information on the DPA, please consult our advisory here.

[3] 87 Fed. Reg. 35,071; 87 Fed. Reg. 35,073; 87 Fed. Reg. 35,075; 87 Fed. Reg. 35,077; 87 Fed. Reg. 35,079.

The DPA allows the President to expedite and expand the supply of materials and services from the U.S. industrial base needed to promote the national defense, and explicitly grants authority to address mining and the production of minerals essential to national security. While the DPA permits the President to directly purchase minerals, reports indicate that the administration instead plans to fund mineral surveys and expand or modernize existing facilities. Indeed, the directive tasks the U.S. secretary of defense with conducting feasibility studies for new projects, increasing production of by-products and co-products as well as waste reclamation at existing mines, and upgrading and expanding existing facilities.

President Biden’s memorandum is a continuation of the administration’s policy of establishing more resilient, diverse and secure supply chains in the United States. The administration’s policy is discussed in detail in recently released reports on six critical industrial sectors, and in 100-day supply chain reviews.

The Presidential directive also comes shortly after U.S. Trade Representative Katherine Tai’s testimony before the House Ways and Means Committee, in which Ambassador Tai signaled a shift in strategy for curbing anti-competitive Chinese trade practices. In particular, Ambassador Tai noted that existing tools have failed, and rather than imposing new trade penalties on China, a shift to a form of industrial policy of expanding U.S. production in critical sectors, including key mineral mining and processing, may be appropriate.

Critical minerals – and their importance to America’s industrial bases – have long been a thorn in U.S.-China trade relations. Currently, China is the largest source of mineral commodities for the United States and many critical minerals used in manufacturing are produced exclusively by Chinese companies. In 2021, the United States was 100 percent import-reliant for 17 mineral commodities and at least 50 percent import-reliant for 30 others. With the Administration directing resources toward shoring up and building out domestic capacities for the five identified minerals, companies in those industries or that rely on such minerals should keep watch of opportunities for growth.

Hot Market / Cold War: Is China Your Best Customer or Your Biggest Threat?

March 29^th 12:00 – 1:00 PM ET

Relations between the United States and China have been tumultuous over the last decade -especially in recent years - however, trade and investment ties remain robust between these two economic powers. In this one-hour webinar we will discuss the state of U.S. – China relations and how they have evolved in recent years; whether and where the U.S. should focus on strategic competition or seek cooperative action; the challenges business face doing business in or with China; and what role the Biden Administration, U.S. Congress and other global economic and trade institutions may play in the determining the path forward. Our discussion will feature Kelley Drye International Trade and Government Relations partner, Paul Rosenthal, and Kelley Drye Senior International Trade/Government Relations Advisor, Bill Reinsch, and be moderated by Kelley Drye International Trade Chair, John Herrmann.

Please RSVP here.

Phase One: 100-Day Supply Chain Reviews

The 100-day report also provided recommendations ranging from investing or promoting investment in manufacturing and R&D, to deploying procurement, technical assistance, grants, and financing to support supplier diversification, to using market tools to support sustainability and workforce standards, to expanding multilateral engagement with global allies and strengthening international trade rules. For additional information and analysis on the Executive order and the administration’s 100-day report, please visit our blog here and here.

Phase Two: One-Year Sectoral Assessments

• Department of Defense: Securing Defense-Critical Supply Chains focuses on the following five areas: (1) Kinetic capabilities; (2) Energy Storage and Batteries; (3) Castings and Forgings (“C&F”); (4) Microelectronics; and (5) an update of the 100-day critical minerals and materials report.
• Department of Energy: America’s Strategy to Secure the Supply Chain for a Robust Clean Energy Transition focuses on the following technologies: (1) carbon capture materials; (2) electric grid; (3) energy storage; (4) fuel cells and electrolyzes; (5) hydropower including pumped storage hydropower; (6) neodymium magnets; (7) nuclear energy; (8) platinum group metals and other catalysts; (9) semiconductors; (10) solar photovoltaics; and (10) wind.
• Department of Commerce / Department of Homeland Security: Assessment of the Critical Supply Chains Supporting the U.S. Information and Communications Technology Industry focuses on (1) software, including risks associated with open-source; as well as manufacture of (2) printed circuit boards; (3) fiber optic cable; (4) printed circuit board assemblies and subassemblies; (5) routers, switches, and servers; and (6) LCDs/Displays.
• Health and Human Services: Public Health Supply Chain and Industrial Base focuses on (1) personal protective equipment; (2) durable medical equipment; (3) testing and diagnostics; and (4) pharmaceuticals.
• Department of Transportation: Transportation Industrial Base Freight and Logistics focuses on (1) physical infrastructure (including needed developments); (2) congestion and bottlenecks; (3) data availability and research gaps; (4) supply chain security; (5) freight and warehousing; and (6) rules and regulation.
• Department of Agriculture: Program and Policy Options for Strengthening Resilience focuses (1) consolidation within the industry; (2) labor; (3) ecological and climate risks; (4) transportation bottlenecks; and (5) international trade.

Key Takeaways

1. Like the 100-day reports, the one-year and capstone reports acknowledge the need to work with “allies and partners” in securing supply chains, in particular where domestic sources may not exist. The elevation of “near-shoring” or “ally-shoring” as reasonable alternatives to on-shoring or building up domestic production capacity is an acknowledgment by the Administration that not every link in every supply chain can be reasonably located in the United States. But the identification of global trusted partners as opposed to adversarial or unaligned nations is a critical element of the Administration’s approach to supply chain security.

2. Supply-chain policy is here to stay and U.S. industry has a critical role in the development and implementation of that policy. These sectoral assessments are the result of what the report’s describe as a “whole-of-government” effort that is supported, in turn, by U.S. industry. In addition to the headlined agencies, many other agencies and sub-agencies have been gathering data from industry over the past year. By participating in these supply chain analyses, industry has shaped these initial outcomes.

The EO also requires quadrennial reviews involving ongoing data gathering and supply chain monitoring, with the next set of reports to be released in 2025. In addition, many of the sectoral reports note the creation of new interdisciplinary task forces that will continue to grapple with supply chain policy issues. As a result, industry members should continue to remain engaged and look for opportunities to collaborate with the government.

3. A critical pathway toward more resilient supply chains is through promotion of targeted investment and market development, both domestically and abroad. The reports collectively identify several recent investments the government has undertaken to support increased domestic production. For example, the Department of Energy will invest $7 billion from Bipartisan Infrastructure Bill in large-capacity battery supply chain, including material refining and production, battery cell and pack manufacturing, and recycling. Additionally, the Department of Defense has invested to re-shore production of rare earth metals. Investments in U.S. production of semiconductors by leading foreign corporations in allied nations are also touted.

A Larger Framework to Promote Domestic Manufacturing

In July 2021, President Biden issued EO 14036 on Promoting Competition in the American Economy. The EO recognized the importance of robust and diverse agriculture, information technology, telecommunications, and healthcare sectors to the long-term resilience of competition, supply chains, U.S. workers, and consumers. Through EO 14036, President Biden pledged a whole-of-government approach to defending against “the monopolization of the American economy.”

President Biden has advocated for comprehensive competitiveness legislation, including the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act (which passed in the House of Representatives) and the United States Innovation and Competition Act (USICA) (which passed in the Senate). These legislative vehicles include numerous, wide-ranging provisions aimed at promoting investment in the domestic industrial base and domestic manufacturing (including to expand supply of semiconductors through the Creating Helpful Incentives for Production of Semiconductors (CHIPS) for America Act), shoring up supply chains, and combatting unfair trade practices.

And most recently, consistent with the policy of leveraging the government’s purchasing power to strengthen the resilience of supply chains, the Federal Acquisition Regulatory (FAR) Council published a final rule amending the Federal Acquisition Regulation (FAR) to strengthen Buy American Act (BAA) requirements in accordance with President Biden’s January 25, 2021 Executive Order (E.O.) 14005, Ensuring the Future is Made in All of America by All of America’s Workers. This new rule increases the BAA’s domestic content threshold for certain end products and construction materials.

As the Administration works toward institutionalizing domestic competitiveness and supply chain resilience, policy recommendations will translate into programs, guidance, and directives. This may create opportunities or areas of risk for U.S. companies, particularly domestic manufacturers, as the key agencies navigate the complexities of implementing proposals and distributing funds. We are available to help you understand and evaluate how your company’s business strategy and planning may interact with these broad-reaching, cross-government policies.

What Happened

Despite explicit and repeated advisements to the contrary, Sojitz HK employees, including one holding a mid-level managerial position, arranged a trading agreement with suppliers in Thailand for the purchase of Iranian-origin high density polyethylene resin (HDPE) to be resold to customers in China. Sojitz HK used its Hong Kong bank to make payments to its suppliers totaling over $75 million. Those U.S. dollar payments were processed and settled through U.S. financial institutions, causing those institutions to impermissibly facilitate the sale of Iranian-origin goods. Company officials and executive management, as well as the U.S. institutions processing the payments, did not detect the involvement of the Iranian actors because the noncompliant Sojitz HK employees removed mention of Iran from relevant transactional documents. Moreover, the employees concealed this circumvention of Sojitz HK policy during the company’s internal approval process.

The settlement amount reflects OFAC’s balancing of several mitigating and aggravating factors. Mitigating factors include Sojitz HK’s organized and voluntary disclosure of the apparent violations, the lack of any violations in the past five years, and the company’s proactive implementation of strengthened compliance procedures. Aggravating factors include the employees’ knowing violation of U.S. sanctions as well as OFAC’s finding that the trading agreement conferred a substantial economic benefit to Iran and undermined U.S. sanctions targeting Iran’s petrochemical sector.

Lessons Learned

U.S. dollars - This case is a reminder that the use of U.S. dollars in cross-border trade often triggers U.S. jurisdiction, even if the underlying trading activity occurs outside of the United States, because U.S. dollar payments often flow through U.S. financial institutions. In this case, a non-U.S. company violated U.S. primary sanctions rules for “causing” U.S. financial institutions to support Iran-related business that was otherwise conducted outside the United States.

Iranian-origin goods - The U.S. embargo does not just apply to direct dealings with Iran; it also applies to dealings in Iranian-origin goods between non-sanctioned countries, like Thailand and China. Companies outside the United States should have processes in place to identify transactions that may implicate U.S. sanctions rules and ensure that those transactions occur in compliance with OFAC’s regulations to the extent that U.S. jurisdiction applies.

Employee misconduct - The violations in this case were the result of intentional employee misconduct. As noted by OFAC in the settlement agreement, companies should adopt internal controls designed to spot this type of activity, to the extent possible, before it becomes a systemic issue that could generate substantial liability. Such measures may include risk assessments, testing and auditing of compliance program procedures, and ensuring that appropriate controls apply to overseas subsidiaries.

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Please contact our sanctions and export control team if you have any questions about building an effective compliance program.

• Expand domestic preference procurement policies applicable to federal financial assistance programs for public works infrastructure;
• Increase the domestic component content requirements of products and construction materials sold to the Federal Government under the Buy American Act; and
• Provide transparency into governmental contracting decisions related to domestic sourcing.

BACKGROUND

The IIJA contains approximately $550 billion in new infrastructure spending over current spending levels and covers roads and bridges, public transit, rail, safety and research programs that are typically included in five-year surface transportation reauthorizations. Additionally, the five-year bill makes major investments in drinking and wastewater infrastructure; ports and airports; broadband; grid security; and clean energy programs (e.g., electric vehicle infrastructure and carbon capture). The bill also includes major domestic procurement ("Buy America") requirements for infrastructure materials.

“BUILD AMERICA, BUY AMERICA"

In summary, the BABA would bar the award of federal financial assistance for infrastructure unless all of the iron, steel and manufactured products and construction materials used in the project are produced in the United States.[1]

Waivers traditionally available under existing Buy America laws are authorized under the BABA where (1) applying the Buy America requirement would be inconsistent with the public interest; (2) where the iron, steel, manufactured products and construction material is not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality; and (3) where inclusion of the domestic products or construction materials will increase the cost of the overall project by more than 25 percent. In addition, Congress directs that the BABA be applied in a manner consistent with U.S. trade agreement obligations related to government procurement.

Robust Origin Standards

The BABA imposes robust origin standards for the products and construction materials acquired for federally-assisted infrastructure projects. The bill defines “produced in the United States” to mean, “in the case of iron or steel products, that all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States.” Similar origin standards for iron and steel are currently imposed by regulation and agency guidance to federal-aid subject to existing Buy America laws, including those applicable to certain federal-aid transportation infrastructure programs as well as federal-aid clean and drinking water infrastructure programs.

The BABA will impose Buy America requirements on nonferrous construction materials – a break in precedent from existing Buy America laws applicable only to iron and steel. It identifies common construction materials as nonferrous metals, plastic and polymer-based products, glass (including optic fiber), lumber, and drywall. The BABA directs the imposition of similarly significant “all manufacturing processes” origin standards for non-ferrous construction materials. The OMB is required by the BABA to issue standards that define “all manufacturing processes” for construction materials.

Relative to the origin standard for manufactured products, the BABA is more explicit. Manufactured products will be deemed produced in the United States if: (1) the product was manufactured in the United States; and (2) the cost of the product’s components mined, produced or manufactured in the United States exceeds 55 percent of the total cost of the product’s components. This origin standard is consistent with the recently revised origin standard for domestic end products and construction materials under the federal BAA, but not reflective of changes to the BAA’s origin standard imposed by another section of the IIJA.

Rapid Timeline for Implementation

The BABA imposes a rapid timeline for implementation.

Upon enactment: The Office of Management and Budget (OMB) is directed to issue guidance to Federal agencies to assist in identifying programs that have “deficient” Buy America coverage and to issue guidance to assist Federal agencies in applying new domestic content preferences.

The BABA deems as deficient those programs that are not currently subject to Buy America requirements at all, are subject to limited Buy America requirements, the scope of which does not include iron, steel, manufactured products and construction materials, or are subject to Buy America requirements that have been waived by generally-applicable and longstanding waivers. For example the Buy America requirement imposed by 23 U.S.C. § 313 is limited in application by the Agency’s implementation policy to iron and steel only. The Federal Highway Administration has estimated that the ferrous inputs account for less than 5 percent of the cost of a federally-aided highway project.

Within 60 Days of Enactment: Federal agencies will be required to submit to the OMB and appropriate congressional committees a report that identifies each Federal financial assistance program for infrastructure administered by the agency, identify the Buy America-type requirements applied thereto, if any, and assess the applicability of any existing domestic content procurement preference, including its purpose, scope, applicability and any exceptions or waivers of the requirement. The agency report must identify the deficient programs not subject to domestic procurement preferences required by the BABA.

Within 180 Days of Enactment: Federal agencies must begin applying Buy America preferences meeting the scope of products required by the BABA. By this time, OMB must issue standards satisfying the “all manufacturing processes” origin standard required by the BABA for “construction materials.”

“MAKE IT IN AMERICA”

Specifically, the “Make it in America” section of the BABA provides statutory authority for the establishment of the new Made in America Office within the OMB. It also includes language aimed at reducing the use of waivers and strengthened application of the BAA, which as noted above, applies to direct procurement by Federal agencies.

The BABA directs the Made in America Office to promulgate guidance to Federal agencies aimed at standardizing and simplifying how agencies comply with the BAA. The guidance is to include the criteria agencies utilize to grant “public interest” and “non-availability” waivers of the BAA, providing some framework to what has traditionally been very murky process. In the context of non-availability waivers the BABA identifies appropriate considerations contracting officers should base waiver determinations upon, including anticipated project delays as well as lack of substitutable articles, materials and supplies.

Similarly, the BABA directs agencies to avoid issuing public interest waivers that would result in decreased employment in the United States both among the entities that produce the product or construction material or that would result in a contract award that would decrease domestic employment. It will also require for the first time that Federal agencies consider whether the cost advantage of a foreign product is the result of unfair trade practices such as dumping or subsidization.

Notably, the “Make it in America” section of the BABA includes a sense of Congress that BAA’s domestic component content standard should be amended by the Federal Acquisition Regulatory Council (FAR Council) upward from 55 percent currently to 75 percent. This sense of Congress is consistent with both the directives of EO 14005 and proposed changes to the Federal Acquisition Regulations (FAR) included in a notice of proposed rulemaking (NPRM) issued by the FAR Council in July of 2021. The July NPRM proposed graduated increases to the BAA’s component content standard from 55 percent currently to 75% over five years with a fallback mechanism at prior lower percentage standards in the event of no qualifying offers meeting the higher component content standards. The sense of Congress in the BABA also endorsed a fallback mechanism in the event of no qualifying offers. The BABA directs the FAR Council to amend the Part 25 of the FAR to provide a definition for an “end product manufactured in the United States,” which the FAR Council is poised to do with the current rulemaking.

TRADE AGREEMENT OBLIGATIONS PRESERVED; DIRECTED TO BE REVIEWED

Notably, the IIJA directs an assessment of the impacts of all United States free trade agreements, the World Trade Organization’s Government Procurement Agreement and federal permitting processes on the operation of Buy American laws. The required report is to be made public. While the assessment does not direct a change in policy, it could spur the Administration to reconsider how it interprets limitations on the scope of parties’ obligations embodied in these agreement texts as well as its construction and reliance on delineated reservations to its market access obligations under these agreements.

BUYAMERICA.GOV

Notably, the Director of the Made in America Office at OMB issued late last month a memorandum for senior federal procurement officials that provides specific guidance to Federal executive branch agencies on the use of a digital waiver portal to submit proposed waivers to the Made in America Office and posted on a new dedicated website MadeInAmerica.gov.

CONSIDERATIONS FOR MANUFACTURERS

Manufacturers of nonferrous products used in public works infrastructure projects are likely unfamiliar with the Buy America requirements applicable to certain federal-aid infrastructure programs. Federal agencies subject to existing Buy America laws applicable to iron and steel have, over the last nearly 40 years, adopted consistent standards construing “all manufacturing processes” that require the initial melting stage of steelmaking to occur in the United States. Manufacturers of nonferrous construction materials should take note of this precedent and consider what a comparably inclusive origin standard would look like for their industry sector.

Manufacturers should also assess how the BABA’s waiver transparency requirements and supplier scouting programs may be leveraged to identify gaps in domestic sourcing and inform capital investment planning.

[1] The BABA defines infrastructure as: roads, highways, and bridges; public transportation; dams, ports, harbors, and other maritime facilities; intercity passenger and freight railroads; freight and intermodal facilities; airports; water systems, including drinking water and wastewater systems; electrical transmission facilities and systems; utilities; broadband infrastructure; and buildings and real property.

The new E.O. resets the U.S. government’s approach to ICTS by ordering a review of the national security threats posed by software applications that collect Americans’ sensitive personal and business data and by foreign adversaries’ access to large repositories of U.S. person data. New restrictions are likely following that review, and companies that rely on software applications owned or managed by companies linked to China or other potential foreign adversaries, should closely watch developments in this space.

New reports on “unacceptable or undue risks” posed by foreign adversary-connected applications

The E.O. directs the Directors of National Intelligence and Homeland Security to provide threat and vulnerability assessments to the Secretary of Commerce. In turn, the Commerce Department will draft two reports on foreign adversary-connected software, defined as software that has the ability to collect, process, or transmit data over the internet. The reports will recommend actions to protect against harm from the sale of, transfer of, or access to U.S. persons’ sensitive data, including personally identifiable information, personal health information, and genetic information. In addition, the Commerce Department will recommend additional actions to address risks associated with software applications that are designed, developed, manufactured, or supplied by persons owned or controlled by, or subject to the jurisdiction or direction of, a foreign adversary.

Several criteria indicate national security risk of ICTS applications

Building on the criteria to assess national security threats listed in E.O. 13873, the new E.O. lists several factors that will be considered when evaluating the risks posed by foreign adversary-connected software, including:

• ownership, control, or management by persons that support a foreign adversary’s military, intelligence, or proliferation activities;
• use of the connected software applications to conduct surveillance that enables espionage, including through a foreign adversary’s access to sensitive or confidential government or business information, or sensitive personal data;
• ownership, control, or management of connected software applications by persons subject to coercion or cooption by a foreign adversary;
• ownership, control, or management of connected software applications by persons involved in malicious cyber activities;
• a lack of thorough and reliable third-party auditing of connected software applications;
• the scope and sensitivity of the data collected; the number and sensitivity of the users of the connected software application; and
• the extent to which identified risks have been or can be addressed by independently verifiable measures.

These criteria will inform the U.S. government’s decision-making framework to adopt a “rigorous, evidence-based” analysis to address risks posed by ICTS transactions involving foreign adversary-connected software.

Further action on ICTS applications likely

Although yesterday’s E.O. rescinds the previous E.O.s dealing with Chinese mobile applications, new restrictions on Chinese and other software that collect large amounts of sensitive U.S. person data are likely to flow from the Commerce Department’s forthcoming report and recommendations, which are expected within 180 days. Furthermore, the E.O. provides the Commerce Department with authority to restrict transactions and business activities that may:

• Pose a risk of sabotage or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of ICTS in the United States;
• Pose a risk of catastrophic effects on the security or resiliency of the critical infrastructure or digital economy of the United States; or
• Otherwise pose an unacceptable risk to the national security of the United States or the security and safety of United States persons.

The report stems from President Biden’s Executive Order 14017 (“EO 14017”), which established a wide-ranging whole-government evaluation of America’s supply chains. The report and recommendation released today concerns 100-day reviews involving four specific supply chains:

• semiconductors and advanced packaging;
• high-capacity batteries;
• critical minerals and other identified strategic materials; and
• active pharmaceutical ingredients.

Trade Enforcement: A recurring theme throughout the document relates to the use of the trade enforcement toolkit, including the establishment of a U.S. Trade Representative-led trade strike force, to identify unfair foreign trade practices that have eroded U.S. critical supply chains and to recommend trade actions to address such practices. The report also specifically recommends a potential Section 232 investigation of neodymium permanent magnets, suggesting that the Biden Administration may use Section 232 as a vehicle to address critical supply chain issues, albeit in a more traditional national security context.

Global Nature of Supply Chains: While many of the reports’ recommendations focus on expanding domestic production and labor, the report also acknowledges the need for global supply chains, and the need to work with partners and allies to achieve resilient supply chains.

Leveraging the Government’s Purchasing Power: The report proposes a number of ways the government can leverage its position as a buyer of critical materials to address supply chain concerns. This includes purchasing materials from domestic sources but also developing standards that foreign materials must meet. The report also suggests a strengthening of the National Defense Stockpile and the use of the Defense Production Act program as additional ways of addressing supply chain deficiencies.

Financing/Investment: A systemic lack of financing and a long-term shortfall in investments are identified as a key themes throughout the report. The report makes several financing recommendations that may present domestic and foreign producers with opportunities to expand production capabilities domestically and also abroad.

Sustainability: Sustainability is a key theme throughout the report, both from developing sustainable production in the U.S., sourcing materials produced sustainably abroad, and encouraging allies and partners and partners to develop sustainable supply chains.

Labor: The report identifies a shortage of skilled labor as a significant supply chain issue and recommends investing in training and development programs to ensure the U.S. labor market can meet manufacturing needs.

The administration is also conducting year-long based supply chain reviews of the following six sectors:

• defense industrial base;
• public health and biological preparedness industrial base;
• information and communications technology (ICT) industrial base;
• energy sector industrial base;
• transportation industrial base; and
• agricultural commodities and food products.

DoD’s report will include an update to an ongoing inquiry initiated by President Trump at the end of last year concerning imports of “critical minerals,” which include the following 35 minerals as identified by the Department of the Interior:

Aluminum (bauxite), antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt, fluorspar, gallium, germanium, graphite (natural), hafnium, helium, indium, lithium, magnesium, manganese, niobium, platinum group metals, potash, the rare earth elements group, rhenium, rubidium, scandium, strontium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, and zirconium.

Like President Biden’s order, DoD’s request for comments signal’s a potentially broader approach to supply chains than the approach taken by President Trump. In particular, DoD is specifically requesting comments and information related to “diversifying sources of supply for strategic and critical materials, including domestic sources and foreign allies / partners.”

All members of the supply chain, including consumers and producers of both upstream and downstream products, are encouraged to participate. The deadline to file comments is Wednesday, April 28, 2021.

At a high level, the new rule prohibits the export, re-export, or transfer of certain items produced outside the United States if you know that the foreign-made item will be incorporated into or used in the “production” or “development” of an item intended for a designated Huawei entity or if the foreign-made item will be provided to a designated Huawei entity. The rule also applies to shipments involving certain foreign-made items where Huawei plays any role, including as a purchaser, intermediate consignee, ultimate consignee, or end-user.

The following foreign-made items are subject to the new rule:

• Foreign-made items that are direct products of technology or software subject to the EAR and that are classified under Export Control Classification Numbers (ECCNs) 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, or 5E991; or
• Foreign-made items that are produced by a non-U.S. plant or major component of a non-U.S. plant if that plant or major component is itself a direct product of U.S.-origin technology or software classified under those ECCNs.[1]

The August 20 rule also adds 38 additional Huawei companies to the Entity List and replaces a temporary general license with an authorization that allows parties to provide limited security cybersecurity research to designated Huawei entities. Other transactions involving Huawei that are subject to the new rule require a license from BIS. Such license requests will generally be reviewed pursuant to a “policy of denial,” unless the transaction involves items that are only capable of supporting equipment at below the 5G level (e.g., 4G and 3G technology).

[1] The new rule contains a savings clause excluding from control certain foreign-made items that were in production prior to August 17, 2020 until September 14, 2020. The savings clause is narrow in scope and should be reviewed carefully.

In this post, we highlight some key risks that companies should consider when doing business in the region against the backdrop of rising U.S.-China tensions.

1. Hong Kong

a. The HKAA: Reports, Blocking Sanctions, and Foreign Financial Institution Secondary Sanctions

The first report must identify foreign persons who have materially contributed to the “failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law” within 90 days.* Once identified in the first report, the President may impose sanctions on the listed parties. Within a year, however, the President must impose sanctions on the listed parties, which may include blocking sanctions and visa restrictions. Blocking sanctions essentially prohibit a sanctioned party from conducting business dealings or financial transactions that involve the United States, cutting the sanctioned party off from the United States and much of the global financial system.

The first HKAA report must be followed up within 60 days with a second report identifying foreign financial institutions that knowingly conduct a “significant transaction” with a person identified in the first report. The HKAA then requires the president to impose at least five “secondary sanctions” on the offending financial institution within a year of the report and impose the full menu of ten secondary sanctions within two years of the report.**

Sanctions under the HKAA can be waived if the actions of the listed parties or foreign financial institutions did not have a significant and lasting effect on Hong Kong, the actions are not likely to be repeated in the future, and the party or foreign financial institution has reversed or otherwise mitigated its sanctionable conduct.

b. E.O. 13936 Blocking Sanctions

c. Export Controls & Trade “Normalization” with Hong Kong

Companies that export or import goods to or from Hong Kong need to review these changes and ensure their trade compliance programs account for the updated rules. Companies relying on license exceptions in the past must ensure they have processes in place to obtain individual licenses from U.S. authorities before exporting, re-exporting, or transferring items subject to U.S. export control laws to Hong Kong.

2. Xinjiang Sanctions & Supply Chain Risks

Taken together, these measures amount to significant new trade compliance risks for companies that operate in or deal with companies in Xinjiang. To address these risks, companies should adopt robust due diligence procedures to screen for the involvement of sanctioned parties or supply chain risks that could result in financial or reputational damage to the company.

a. Blocking Sanctions

Even with the general license, the designation of the XPCC could have far-reaching effects for U.S. and global companies that do business in or related to Xinjiang. According to media reports, the XPCC has broad reach in Xinjiang and elsewhere, employing a significant percentage of the population and controlling up to 20 percent of the economy of the region. Companies doing business in the region must adopt rigorous due diligence procedures to identify business partners that may be ultimately owned by the XPCC to prevent violations of the new U.S. sanctions.

b. Entity List Restrictions

As with the designation of the XPCC, the only way to comply with the new Entity List restrictions is to screen transactions for the involvement of sanctioned parties.

c. Supply Chain Risks

• The provision of surveillance goods, services, or technology (e.g., cameras, tracking technology, biometric devices, among others) that may be deployed in Xinjiang;
• Relying on labor or goods sourced in Xinjiang or from factories in China that may utilize forced labor from Xinjiang; and
• Assisting with the construction of internment facilities used to detain Muslim minority groups, and/or manufacturing facilities that are located nearby these internment camps.

The Advisory also identifies the following industries as having a heightened risk of involving forced labor sourced from Xinjiang: Agriculture; Cell Phones; Cleaning Supplies; Construction; Cotton Yarn, Cotton Fabric, Ginning, Spinning Mills, and Cotton Products; Electronics Assembly; Extractives (including coal, copper, hydrocarbons, oil, uranium, and zinc); Fake Hair and Human Hair Wigs, Hair Accessories; Food Processing Factories; Hospitality Services; Noodles; Printing Products; Footwear; Stevia; Sugar; Textiles (including such products as apparel, bedding, carpets, wool); and Toys.

Companies involved in these sectors in China, or that may otherwise have supply chain exposure to Xinjiang, should review the Advisory in detail and consider their exposure to Xinjiang-related risks with respect to existing relationships and future transactions.

* * * * *

* In the past, the U.S. government has issued similar sanctions reports well after the statutorily imposed deadline.

** Secondary sanctions on foreign financial institutions (FFIs) authorized under the HKAA include prohibitions on: loans from U.S. financial institutions; designation as a primary dealer in U.S. government debt instruments; as service as a repository of government funds; foreign exchange transactions subject to U.S. jurisdiction involving the FFI; transfers of credit or payments between financial institutions or by, through, or to any financial institution where such transfers/payments are subject to U.S. jurisdiction and involve the FFI; conducting transactions involving property interests of the FFI; exports, reexports, and transfers (in-country) of commodities, software, and technology involving the FFI; and investments by U.S. persons in significant amounts of equity or debt of the FFI. The penalties also include the exclusion from the United States of corporate officers and sanctions on principal executives.

The GSP program, established by the Trade Act of 1974, is designed to promote economic development by eliminating duties on certain eligible products when imported from a beneficiary country or territory. The program involves an annual review process during which the USTR and other participating executive branch agencies, through a body known as the Trade Policy Staff Committee (TPSC), assess potential changes to countries and products eligible for duty-free treatment under the program. Private interested parties may petition for modifications to the list of countries and products eligible for GSP treatment. In addition, the TPSC undertakes a triennial assessment of each GSP beneficiary country’s compliance with the statutory eligibility criteria, and may self-initiate a full review of a country’s ongoing GSP eligibility if warranted. Factors for assessment include whether a country is providing workers with internationally recognized labor rights and to what extent the country is providing adequate and effective protection of intellectually property rights, among other factors. See 19 U.S.C. § 2462(c).

Friday’s announcement to suspend GSP benefits for Thailand was the culmination of an eligibility review stemming from a 2015 petition by the AFL-CIO alleging Thailand’s shortcomings in the area of worker rights. The United States had been engaged with Thailand on labor issues in the years prior to the AFL-CIO petition as well. According to USTR, those engagement efforts have not been successful, resulting in the decision to suspend certain GSP trade benefits for Thailand.

Also on October 25^th, USTR announced the following:

(1) The closing of reviews of GSP eligibility for Bolivia (worker rights), Iraq (worker rights), and Uzbekistan (intellectual property protections) without changes to those programs.

(2) The reinstatement – effective October 30, 2019 – of one-third ($12 million trade value) of GSP benefits previously suspended for Ukraine in December 2017 due to Ukraine’s inadequate protection of intellectual property rights.

(3) The initiation of GSP eligibility reviews for Azerbaijan (worker rights) and South Africa (intellectual property protections). USTR will announce future opportunities for public hearing and comment on these eligibility reviews.

Please contact us with questions about these specific GSP changes or the GSP country/product review process.

While it has been known that North Korea sends workers abroad, this report is the first time the supply chain has been documented to show North Korean forced labor products entering the U.S., which is a federal crime. It has been reported that North Korea sends tens of thousands abroad, bringing in revenue estimated at $200-$500 million per year as Kim Jong Un keeps a large percentage of the salaries. According to the AP, the North Korean workers in China remain under constant surveillance and live in forced labor conditions.

In August, 2017 President Trump signed legislation which makes it a crime to import products made by North Korean workers anywhere in the world and authorizes new economic sanctions against North Korea on goods produced by North Korean forced labor. The new U.S. law labels all North Korean workers, both in North Korea and abroad, as forced labor. Customs is reviewing the report and considering enforcement measures including prohibiting goods from entering the U.S. In addition, if Customs finds evidence of forced labor, the matter will be turned over to Immigration and Customs Enforcement (ICE) - Homeland Security for a criminal investigation. Importers are encouraged to review their supply chains to ensure that their goods are not manufactured by slave or forced labor.